After all, isn’t pretty much everything just worth whatever people are willing to pay for it?
In: Economics
A key thing in any market-based valuation is that the listed price is whatever the *last* person paid for it.
Suppose there’s a stock with 1 million shares. Yesterday, someone paid $100 to buy it. A simple (and popular) calculation of the total value of those 1 million shares – its “market cap” – is $100 million. Should you trade $100 million for ownership of all those shares? Probably not.
That market cap calculation is based on the assumption that because one guy bought the stock at $100, you could find 1 million other buyers who all agree it’s worth that much. This assumption isn’t so bad if the price of the stock is stable and based on fundamental things like the profitability of the company that issued it. However, it really starts to break down in speculative environments where the main determinants of valuation are how much others expect the stock’s price to go up and how much they’re willing to risk on that bet.
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